Booncast Episode 2: Using Fringe Dollars to Create an ERISA Retirement Plan
Erik Little, Director of Retirement at Boon, joins Booncast to share his expertise on how government contractors can utilize fringe dollars to create an ERISA retirement plan. Listen now to learn more about the distinct advantages of setting up an ERISA retirement plan, the difference between a 401(a) and a 401(k) (and why it matters), and DOL compliance as it applies to retirement benefits.
More resources related to this episode:
- 401(a) vs. 401(k)
- How a Fringe Benefit Plan Drives Competitiveness
- Tips for Navigating a DOL Audit
- Rest Easy Retirement Solutions
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Episode Transcript:
Hello and welcome to Booncast, a podcast where we discuss evolving healthcare needs and flexible employee benefit solutions. Join our experts for unique insight into the niche market of fringe administration, solutions to address the needs of the American employer and the hourly worker, compliance concerns, and updates on developing topics in the industry.
Caitlin Kennedy with Booncast: Welcome to Episode 2 of Booncast. Today’s guest host is Erik Little, Director of Retirement at Boon. He’s going to be walking us through the unique elements that contractors face when setting up a retirement plan, and how the fringe can be used to create a more meaningful solution. So Erik, tell us a little bit about yourself and what you do!
Erik Little: Hey, Caitlin, thanks for having me today. What I do is I run the Retirement department here at Boon, and I’ve been with The Boon Group for almost 15 years. And what I like about working at The Boon Group is that we get the unique opportunity to do everything that would otherwise apply to corporate retirement plans, with a unique twist of applying to government contractors that are subject to either the Service Contract Act, or Davis-Bacon.
If those terms don’t mean anything to you, you’re probably on the wrong podcast. But if you know anything about Service Contract Act or Davis-Bacon then you realize that there are nuances that a lot of people aren’t aware of. And that’s part of the reason why I like working at The Boon Group is that we really get to be experts in a niche area, that doesn’t apply to everybody. But if it does apply to you, it’s very important. Those are our clients and the people that we’re here to serve.
Caitlin Kennedy: Exactly. We’re absolutely dealing with a very unique niche. So, what are some of those challenges and the advantages that government contractors face when they’re setting up a retirement plan?
Erik Little: Well, the first thing that government contractors need to realize is that they’re in a fortunate position that they have dollars in the contract to spend. So, if you’re subject to some kind of a prevailing wage or the Service Contract Act, you have dollars that you’re obligated to give your employees either in cash or in benefits. Now, if you give it to them in cash employees like that, but it’s more expensive. You have to pay payroll taxes, workers’ comp, and that can add up. Not only can it be a significant amount of money, it can put you at a disadvantage to contractors that are using those monies and putting them into benefits and avoiding those additional costs. It might not sound like a lot, but if you’re saving $1000 to $1,500 per person on a 100-life contract, that’s a significant amount of money. And when the government is looking at awarding contracts on a low price, “technically acceptable” basis that can be the difference between winning and losing. How do you handle that fringe? How are you going to satisfy the obligations that you are required to (ie: you need to pay it)? But how can you do that in a way that allows you to attract the employees that you want, retain the employees that you want, win contracts, and grow your business?
Part of the reason we like working at The Boon Group is that, really, it starts with the business development strategy of “How are you bidding contracts?” and “How are you growing your business?” first. If you decide that benefits — not paying in cash — is something that makes sense, then all of the wonderful things that we do with The Boon Group to help you stay in compliance and give you competitive products then make a lot of sense.
Caitlin Kennedy: So why might a contractor choose to utilize those fringe dollars in setting up a retirement plan?
Erik Little: Well, you have an option of how to spend the money, right? Oftentimes, employees either might already have healthcare through TRICARE; we work with a lot of government contractors that hire former military people. They don’t want another insurance. Depending on the health plan that you choose, you may have a difference in the amount of fringe that you have, relative to the amount of premium that you have to spend. So, there might be a delta. So, your health plan costs $3.75 an hour, but you have to spend $4.50, where’s that other 75 cents going to go? It may be that an employer is too small and simply isn’t a good candidate for healthcare, right? Healthcare gets graded based on group size, and you may not be able to get a fully insured major medical program if you’re a smaller contractor who’s really trying to build their business.
And you know, the other part about it is that retirement as part of your benefit package makes a lot of sense because a lot of times, especially with the younger employees, there’s this myth that you’re not going to need your health insurance. “What am I even doing this for?” You know, young guys do get sick, they do break their ankles, riding motorcycles and playing basketball and things of that nature.
Caitlin Kennedy: Right.
Erik Little: But when you put money into a retirement plan, it feels a little different. Because, as you see those dollars grow, those employees know that they’re going to take that money at some point. It’s not just being thrown down a well. Where okay, you have insurance coverage. We all have car insurance, and we all have house insurance. And we’re happy we’re not in a car wreck, and we’re happy our house didn’t burn down. But we still paid for that insurance, right? So, when some of that fringe goes into building a financial nest egg for your future, you feel better about that. You see that money growing. It’s not going into a black hole that you might not feel is benefiting you directly.
So, retirement as a part of a strategy for employers, to say, “Hey, we have this fringe. We realize that many of you may want your money in cash, but we’re doing benefits.” And, by the way, if you’re putting $2, $3, $4 — for Davis-Bacon contractors, it can be as much as $10, $15 or $20 — into a fully invested retirement plan, a lot of employees, especially the better employees, really come to understand and appreciate that and see a nest egg grow that they may not have thought applied to them. That’s really exciting to see and that’s really what we do see quite often. Employees that may not have thought of investing as something that was pertinent to them — saving it up in a 401(k). Putting away your own money can be difficult and there’s a little bit of a hurdle sometimes.
So, when an employer automatically puts in $5000, $6000, $7000, $8,000, for an employee, when they see an account balance go to $20,000 $30,000, $40,000, oftentimes, they go from an hourly-based employee to an investor. They take a lot of interest in that and really appreciate what their employer has done for them. Because they know that they more than likely would not have done that on their own if their employer hadn’t set up a program like this. And that’s what those benefit dollars are really for.
Caitlin Kennedy: Oh, that’s fascinating stuff. So, when creating a retirement plan with the fringe, what are the factors that government contractors should consider?
Erik Little: Well, the first thing you need to do is “Do you want to do this?” and if the answer is yes, you need to go look at your plan document (your adoption agreement). If you don’t have a plan, you need to make sure that your plan that you do set up has the right wording. Under ERISA, every qualified plan has to be in writing. That’s a requirement. Think of it as the rules of the game. What happens is that there’s a lot of flexibility in how you can set up retirement plans, but you do have to set the rules and you do have to follow them.
So, if you have a current plan, you need to see “Does my plan allow for Service Contract Act prevailing wage contributions? Does it have the right language to allow me to make that contribution? Is the vesting schedule right?” Most of our clients want new employees subject to Service Contract or Davis-Bacon to be eligible to participate Day One, because those obligations start Day One. Well, under your eligibility and your current plan, do you have any eligibility requirements? Is there a length of service or age requirement?
There’s a lot of things that are very common ways to design plans that make sense in the commercial world, that don’t make sense for a government contractor. What you really need to do is sit down and look at your current plan. How is it written? Is this going to help me? What is it that I need to change, add, or amend to make sure that I’m accomplishing what I want to from a business perspective, but I’m not creating a compliance problem? Because you can do something completely legal in the eyes of the IRS, but if it’s not written into the plan document, or you’re not following your plan document, you create a real headache for yourself.
Caitlin Kennedy: So, you touched on earlier, kind of the familiarity that most people have with the 401(k). There’s also a 401(a) that’s maybe a little lesser known. What is the difference between a 401(a) and a 401(k) and why is that difference important?
Erik Little: Well, it’s kind of funny, because everything started with 401(a). So, when you think of 401(a), 401(k), 401(m), those are all just lines in the tax code. And it really did start with Section 401, Subsection A. And when you can think of that you can think of it as employer paid. In the commercial world, that’s profit sharing. The employer is the one funding the contribution. We don’t like to use the word profit sharing in government contracting because the money’s baked into the contract. We don’t really want to refer to it as profit. The point is that 401(a) is the employer making the contributions, and the tax reporting differs on who was making those contributions.
So, the 401(a) is the employer making the contribution — in our world is the government contractor. They’re using funds that are embedded in the contract which stipulate the amount per hour that they need to contribute to an employee. A 401(k) is specifically employees choosing to divert part of the salary that they’ve already been promised. So, on a 401K that’s where, for a lot of people, that vernacular starts and stops because that’s what you hear in the media and hear around it’s “401(k). 401(k). 401(k).” But the reality of it is, is that the difference is that it’s who is making the contribution. If the employee is making the contribution, it’s a 401(k). If the employer is making the contribution on a non-elective basis, meaning that you’re giving the money to the employees. They don’t have to do anything. They’re eligible for this contribution. It’s a 401(a).
The reason that’s so important to know the difference is that tax reporting is different. Payroll taxes apply to 401(k) contributions. They don’t for 401(a) contributions. So, if you, as the employer and the government contractor, decide, “Hey, I’m gonna put these fringe dollars into the 401(k)” and you tell your payroll vendor — could be an ADP, a Paychex, a Paycom, whoever it is — they think of it as an automatic enrollment. Which is very, very, very common in the commercial world. And they put that into the 401(k), all of the tax reporting is wrong, and you’re not going to get any of the payroll tax savings that you thought you were.
So, each type of plan is tested differently. Each type of plan has its own rules, and they have separate rules around payroll tax reporting. It’s very important for the employer, and especially their payroll person, to know if the money going into the plan is a “(k)” or an “(a)”. Now we’re here to help you with all that. From a participant perspective, they often think of it as one account (and it is managed as one account) but the dollars are tracked separately. That’s why it’s so important. So, you need to be very specific about who is contributing what, to make sure that all of the reporting — and all of the accounts — are correct.
Caitlin Kennedy: So, speaking of tracking. How did the Department of Labor’s requirements on proper tracking of benefits apply to investments within a retirement plan?
Erik Little: Well, the Department of Labor doesn’t really distinguish between 401(a) and 401(k). The rules are the same. When it comes to investments, you have to have a prudent process in selecting and monitoring the investments in the program. An employer can do that on their own if they feel like they’re competent and can do that. If they don’t feel like they are, they have a duty to go find an outside expert. There’s lots of investment advisors that will help with choosing the investments. It’s an important task.
There’s no real difference, from a Department of Labor perspective, when it comes to selecting and monitoring the investments. Whether it’s a 401(k), an “(a)”, a GovCon or a commercial, what they want is an employer to really… the number one thing under ERISA is to make sure it’s in the best interest of the participants. Right? So, it’s very broad, it gets litigated a little bit, but you have to put the participants first. It’s the best practice to really have an investment policy that defines how you’re going to select and monitor those investments. And you can work with an advisor to do that. There’s a lot of different financial advisors out there, some of them share the liability for selecting and monitoring the investments. Some do not.
If I were an employer, I would only work with somebody that had skin in the game and was in the boat with me. That would be a someone with a Registered Investment Advisor. They need to sign on as a co-fiduciary, either as a 3(21) or a full fiduciary as a 3(38). So, there’s different options and there’s different ways to go. But I would only look for advice and financial advice from somebody that was actually obligated to put my best interest and the best interest of my participants first, and actually share the liability with me in some way, either as a 3(21) or a 3(38).
The Department of Labor doesn’t actually make a distinction, when it comes to the investments between a 401(k), an “(a)”, or what kind of employee you are. You’re still subject to ERISA you need to put your participants’ best interest first, and you need to have a documented — a really well-defined investment policy — and a lot of documentation about how you selected and monitor the investments that you made available to the participants. There’s no obligation. Nobody can always choose the number one fund in every time period. It’s really a matter of “Did you use a prudent process?” to select and monitor those investments. And you know, are you driving the car? Every plan that we work with eventually has some kind of investment that maybe is lacking for some reason; a manager change, a style change, maybe another fund comes along that just proven to be better when you go, “Look. you guys were good, but these guys are better.” You know, the marketplace is very dynamic. There’s trillions of dollars in defined contribution plans and there’s a lot of competition. One of the things that’s really come about in the last couple of years is the growth of target date maturity funds. About 75 to 80 percent of the assets that goes to those plans, because most participants need help allocating their money between all the different investment objectives. Some participants want to do it themselves. Some need a little help, some need a lot of help, and some don’t want to do anything. And so how do you make those decisions for those people? There’s a lot of ways to skin the cat. But there really is no… everybody is in the same boat, whether you’re a government contractor or not.
The difference between the government contractor and the commercial group isn’t on the investment side. It’s really on the plan documents side on setting up your plan document to define: Who is making those contributions? Who is eligible? How are you going to operate and administer your plan? How you operate and administer your benefits needs to be in line with your plan document and that’s where a lot of employers go wrong. It’s not so much on the investment side. The investment side, you know, there’s a lot of investment advisors. There’s a lot of good companies. Nobody agrees on everything. There’s literally an infinite amount of fund lineups a plan sponsor can have. we definitely have our view on that and we can help employers with that, but it’s the same. So, whether you’re a contractor or not, how you handle those money and how you choose those investments needs to be in the best interest of the participants and it really needs to be documented. Whatever decision you came to is fine. As long as it’s documented and makes sense, and another prudent expert with like experience would say, “You know what? I might not agree with all that, but what you did made a lot of sense.” That’s basically the standard.
Caitlin Kennedy: Erik, we’re coming to the end of our time, and just thank you so much for sharing your expertise with us. I mean, just fantastic talk. I mean, lots of good stuff here. And I’ll hand it over to you on our way out.
Erik Little: One question left: What does what value does Boon provide to its clients?
Caitlin Kennedy: I was getting to that!
Erik Little: Well, the value is that we are here to work with both sides of the equation. There’s a lot of groups out there that might only work on the ERISA side. There’s a lot of investment advisors that might only work on the investment side. To have a successful program, you really need to have both working together. And then you need to be able to explain that to the employees as well.
So, what do we provide our clients? Well, the whole package. What we want to do is make sure every aspect of the program is working for the employees, so that the value the benefit that they’re getting, they understand why they have the plan that they do. We want to make sure our clients are in compliance. We want to make sure that we take as much of the administrative work off their desk as possible, because there’s a lot that has to go on to run a successful plan. There’s testing every year, there’s a variety of notices that have to go out every year. All of the plans that are larger, 100 employees or more, are subject to an audit every year for the 5500. They can be audited by the IRS or the Department of Labor, as well.
It’s always important to remember that it’s other people’s money. So, when you’re dealing with other people’s money, you have to be able to answer a lot of questions at a moment’s notice. So, what we do is make sure every aspect of the program is running efficiently. That it’s in compliance, and that we can support the employer with whatever might come up. Whether that’s a new contract. Whether that’s an audit. Whether that’s a participant question about “Why do I have this fund and not that fund?” Whatever it may be, we are a true partner and share the liability along the way. But most of it isn’t so much about liability. It’s making people understand and appreciate what they’re being offered, and really valuing the benefit that they have.
We have almost $800 million in assets, and it’s all other people’s money. It’s really important to never forget that. They’ve worked hard for it. There’s a lot of rules and regulations that go around running a retirement plan. Our job is to make it simple for the employer to do this and make sure that they’re spending the right amount of time managing their plan, but not so much that they’re distracted from running their business. Because the only reason we’re in business is that we have clients that are in business, and we want them focusing and growing their business. That’s really the value that we bring to the table.
Caitlin Kennedy: I mean, there’s that enthusiasm. I mean right there! That’s the kind of person you want to have in your corner. Erik, thank you so much for taking the lead on that. Introducing us to what you do with Boon, what Boon does best, and just kind of unpacking all of the secrets to bring in the fringe into a successful retirement plan.
Erik Little: Thank you so much.
Caitlin Kennedy: Erik, thanks so much for talking with us.
Erik Little: Alright!
That’s all for this episode of Booncast! Thank you for listening! Visit us on www.boongroup.com for more podcasts, blog posts, and information on Boon’s benefit offerings.